PCI and PDI Continue to Track a 15% Yield for 2016
PIMCO Dynamic Credit and Mortgage Income Fund (NYSE: PCI) and PIMCO Dynamic Income Fund (NYSE:PDI) continue solid runs on distribution coverage as shown in PIMCO's announcement of August UNII and distribution coverage. The reported data for 31 August cover the period as of August 31 for distributions declared on August 1, 2016. For PCI and PDI, the fiscal year runs July through June, so fiscal-year-to-date coverage is only for the month of July. Undistributed net investment income is cumulative. Last month's data (included here) report the entire fiscal year ending 30 June.
Coverage Is Up
So what we see is that July was a good month for NII for both funds. And the three-month rolling coverage ratio continues to run at more than twice the distribution amounts.
Before we get too excited about the August numbers, let's look at a key footnote in the report. PIMCO tells us, "Bonds covered in the Countrywide representation and warranty settlement positively impacted earnings during the month of June." This refers to a one-time windfall from the long-delayed settlement of $8.5 billion by Countrywide/Bank of America to mortgage bond holders. Fitch notes that 74% have incurred principal write downs, suggesting that PIMCO entered these positions at a substantial discount. Thus, while this is indeed good news for PDI and PCI stockholders, it should not be taken an indication of a remarkable run of highly profitable investments. Rather it's a single good investment that's now turned its profit.
UNII Is Up
What is more interesting, perhaps, is that undistributed net investment income (UNII), a cumulative rather than a fiscal-year value, continues to grow for both funds. It now stands at $0.79 for PCI and $1.34 for PDI. Both of these funds have a history of generous year-end special distributions. Indeed, when one includes PDI's special distribution, it paid out a market yield of 18.3% last year thereby ending 2015 as PIMCO's top-yielding CEF for the year (Buy PIMCO's Best Yielding CEF At A Discount).
Distributions Are Up
PDI has raised its annual regular distribution from 2015's $2.505 to what currently should be (unless something changes in the next three months) $2.646 in 2016, a 5.63% increase. PCI's regular distribution is up 3.27% to $1.9692/share (same assumption on changes) from 2015's $1.9068.
Large Special Distributions Seem Highly Likely
PDI's 2015 special distribution was $2.61 per share. It does not seem likely that a distribution of that size will be repeated in 2016, but consider that the $1.34 UNII does not include any capital gains that may accumulate in PDI's portfolio through year's end. Plus there are five full months of potential UNII accumulation to go in 2016. In fact, one would have greatly underestimated PDI's special distribution on UNII-based reporting alone last year. But even at the current UNII of $1.34/share a special distribution would increase PDI's annual payout by nearly 50%.
PCI paid a $0.23 special distribution in 2015. This report's UNII has the fund approaching four times that amount this year. At $0.79, a special distribution would represent nearly six month's worth of regular distributions putting PCI on track for increasing its annual payout by close to 50% as well.
These values can, of course, change over the next five months reporting before year's end. There is certainly no assurance that coverage rates will not fall leading to future drops in UNII.
PCI Remains PIMCO's Best Buy
I recently wrote about PCI and noted that I considered it the best buy of PIMCO's CEFs (Retirement Income: Is PCI Today's Best Buy From PIMCO?). It currently is carrying a -6.04% discount, ten percentage points better than PDI's 4.05% premium. Plus its 9.82% distribution adds a half point to PDI's 9.33%. Should the year end with a special distribution near $0.80 per share for PCI, shareholders will have received a market yield better than 15% from the fund in 2016.
Not that I would rush out and buy PCI simply because I was expecting a fat special distribution in December, mind you. Buying that distribution late in the year can mean you're simply getting back your own money (and paying tax on it if you don't hold the fund in a tax-deferred or tax-free account). But there are a lot of good reasons to buy PCI now other than the prospects for a big year-end distribution.
The latest coverage and UNII data do nothing but reinforce my view that not only is PCI PIMCO's best-buy fund, but arguably the best buy in the whole fixed-income CEF universe right now. I'm sure some will disagree. I'd love to hear your opinions in the comments if you do. I'd especially like to hear them if you have any suggestions for any better buys.
Disclosure: I am/we are long PCI, PDI.
Additional disclosure: I have no ties to the financial or security industries in any form. My interests are strictly personal. The banker part of the nym has absolutely no relationship to the profession of the same name. Readers should be aware that I am an investing novice. I do not give advice; what I publish is an annotated version of my research notebook. Anyone who finds any securities to be of interest will necessarily want to do his or her complete research and due diligence before acting on that interest. It would be foolish to rely on my conclusions without having done so.